By Geetha Bhaskaran
Special to Gulf News
Investors are turning cautious on high-priced Indian shares as the risk-reward ratio swings to the bottom in Asia, making the case for consolidation in one of the world’s top performing markets this year. Concerns about earnings outlook as the economy struggles with policy changes are also weighing down investor confidence.
Uncertainties galore caused either by the abrupt resignation of Infosys Ltd’s CEO after a spat with the founders of the software services bellwether, or tougher market conditions both within and overseas, stifling bureaucratic red-tape in the wake of a new national sales tax, and continuing reluctance among companies to invest in new projects or expansion are all factors that have dented manufacturing activity.
Reflecting the unease, foreign funds have pulled out about $1.6 billion (Dh5.87 billion) from Indian equities this month. The pace of domestic savings flowing into stocks is also slowing as the glitter and safety of debt funds and gold take precedence.
“The markets have been riding a wave of exuberance,” said equity strategist Ram Suresh. “It’s time to tone down the optimism.”
New Delhi has undertaken a spate of policy initiatives to remove bottlenecks, ease the process of doing business, address nagging issues such as bad loans and bankruptcies, speed up decision-making and launch the Good and Services Tax, the biggest tax reform in 70 years.
However, Suresh said, the implementation of the well-founded policies was a “work-in-progress”, as were the government-led infrastructure projects. When the work is completed these would undoubtedly provide a tremendous thrust to the growth potential of the country, home to more than 1.3 billion people.
Stay grounded
Notwithstanding the longer term potential for robust growth that India offers, it must be noted that the markets may have run ahead for comfort. Indian stocks are currently the second most expensive in Asia, and as the turnaround in earnings may take longer than expected with economic indicators showing a troubling time there is no way the market can sustain the record-setting rally.
After hitting an all-time high of 32,686.48 earlier this month, the top-30 Sensex has come off 3.3 per cent and looks set to post its biggest monthly fall since last November’s 4.6 per cent loss. The widely tracked benchmark closed at 31,596.06, and trading should be volatile in the remaining four trading days of the month because of the expiry of futures and options monthly contracts on Thursday.
The broader 50-share Nifty has shed 2.8 per cent from its record 10,137.85 on August 2. It closed at 9,857.05, and looks set to shed more ground.
Domestic equity funds saw inflows of Rs411 billion (Dh23.56 billion) between April and July, more than triple from the same period a year earlier, according to the Association of Mutual Funds in India. Over the same time, balanced funds — which hedge the risk with share markets by allocating a sizeable portion to debt instruments — took in Rs301 billion, a more than five-fold jump.
In comparison, there was an outflow of Rs2.6 billion from gold exchange traded funds. However, with precious metals gaining strength globally and deepening risk-averse sentiment could revive investor interest in gold-linked securities. A relatively stronger rupee should also aid demand for the yellow metal as an investment avenue.
“Markets could consolidate and be volatile in the near term,” Shibani Kurian, head of equity research at Kotak Asset Management Company, told ET Now television channel. “However, the longer term view on the markets in terms of being positive remains but clearly in the near term, there could be some degree of consolidation given that we have come off a slightly muted earnings quarter.”
She advocates investors to stay grounded and stick to stocks that are driven by domestic consumption such as retail private sector banks, automobiles, oil marketing companies, gas utilities and cement.
Infosys watched
Big investors are keeping an eye on Infosys after Nandan Nilekani, a highly regarded former chief executive, came out of retirement and took over as the new chairman to calm frayed nerves after Vishal Sikka, a technology czar and the first CEO outside the company’s original promoters, quit after an acrimonious spat with the founders, led by former helmsman Narayana Murthy.
Sikka’s sudden resignation had sent shares in Infosys, which is also listed in New York, plunging to their lowest in more than three years, wiping out billions of dollars in market value. A former chief technology officer at German software group SAP, Sikka was spearheading a move towards high-end products such as artificial intelligence, automation, cloud, analytics and big data that won approvals of investors.
However, high salaries and severance packages for top executives and questions regarding an acquisition raised eyebrows of Murthy, who along with six others had built the company based on exemplary governance and egalitarian principles. The often public squabble with the board was seen by at least some people as the founding group’s inability to stomach a free run for an outsider.
“I have come in to focus on the future of the company,” Nilekani, 62, told investors on a call on Friday. “I have come in to take the company forward and deal with its challenges.”
His primary job would be to quickly find a new CEO, restore confidence among staff that number more than 200,000 as well as clients that include many Fortune 500 companies. He would also have to ensure that the company’s shift to higher value products remain firmly on track. The company’s low-end code writing skills and other services that depended on cheap labour hold no future.
“I have a very open mind. I will request our strategy team to take a complete inventory of all things that are going on,” Nilekani said, adding the current strategy would be reviewed on the basis of market size, growth and other factors.
Doubtlessly, big institutional shareholders are watching every move.
“What I do not want to see certainly is a massive 180-degree turnaround in strategy,” Jonathan Schiessl, chief investment officer at Ashburton Investments that owns 6-6.5 per cent of Infosys, told ET Now.
He said there were “two sides” to the fight — the governance issue and the perception that promoters who step away from the business cannot quite detach.
“There are some valid points that promoters were making and on the other side they brought a new guy in, [who] was pulling the company in a new direction which most investors were quite excited about,” he said.
“For us, if there is a genuine governance issue, we will exit the stock without a shadow of doubt. We are spending a bit of time looking at that.”
— The writer is a journalist based in India.
